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INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

Intl. Journal of Political Economy, vol. 33, no. 3, Fall 2003, pp. 5071.
2005 M.E. Sharpe, Inc. All rights reserved.
ISSN 08911916 / 2005 $9.50 + 0.00.

CLEMENTE RUIZ DURN

NAFTA
Lessons from an Uneven Integration
The North American Free Trade Agreement (NAFTA) was the first free
trade agreement between the United States, Canada, and a developing
country, and it was the most ambitious anywhere in the world among
countries with such extreme differences in income and development but
with a geographical proximity that allows integration to take place beyond the trade factor. It could be argued that, more than a trade agreement, NAFTA is a pathway to regional integration. It could provide,
therefore, an opportunity to understand the relationship between efficiency impacts on sector output and employment, the growth rates of
national income and productivity, and the distribution of income within
and among countries.
Ten years after its enactment, the whole region has undergone a transformation: new and larger linkages have emerged in goods and services
production, there has been reallocation of productive capacities, and labor markets have become more integrated. No other region in the world
has witnessed such a transformation; indeed, one of the largest migration processes in world history has taken place between Mexico and the
United States. Debates over the process have been many, but the productive effects of migration have not yet been analyzed. In this article,
the discussion is centered on the emergence of interactions among the
three countries, how they have changed routines and the whole eco-

Clemente Ruiz Durn is Jesus Silva Herzog Professor at the Graduate School of
Economics of the National Autonomous University of Mexico (UNAM), Mexico
City, Mexico.
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FALL 2003

51

nomic organization of production, and how these new patterns of trade,

investment, and migration could affect the future of the region.
The NAFTA Debates: What Was Expected?
In the early 1990s, before the enactment of NAFTA, an important discussion developed on how integration was going to affect national
economies, and, in fact, there was little talk of interactions. Pioneering work by the Institute for International Economics in Washington,
DC, set the initial parameters for discussion: trade and employment
effects. Hufbauer and Schott (1993) used a methodology that made the
American net employment gain a linear function of the U.S. trade surplus with Mexico, and they predicted it would continue to grow at
rates similar to the recent past. Others, such as Lustig, Bosworth, and
Lawrence (1992), argued that direct economic effects of NAFTA would
be small for both Mexico and the United States. The Congressional
Budget Office put together the different pieces of the puzzle, concluding that
despite the variety of methodologies used and the shortcomings individual
NAFTA modeling efforts may have, when taken as a group, the results of
these efforts almost uniformly show that NAFTA will have a small but
beneficial effect on the US economy, the preponderance of evidence from
the modeling efforts points in the same directionthat some economic
sectors would benefit from NAFTA while others may benefit less or even
suffer some losses but on balance the gains for the US economy will be
greater than any potential losses. (1993: 5)

A parallel debate fueled by the Economic Policy Institute argued that

NAFTA was going to cost the United States many jobs. Faux and Lee
(1992) argued that a large deficit in the U.S. trade balance with Mexico
would generate a huge net job loss, and investment flows from the
United States to Mexico would mean plant relocation and job reduction.
Yet the real insights to be gained from international factor movements
relate to the growing cross-border dynamics of labor markets and production sharing. Robinson et al. (1992) and Levy and van Wijnbergen
(1992) were the first to note that economic dislocation in Mexican agriculture could easily lead to an increase, rather than a decrease, in undocumented immigration to the United States. Similarly, with the North
American auto industry as a case study, Hunter, Markusen, and Rutherford (1995) focused on the international coordination of production, pric-

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ing, and sales by multinational enterprises. In an example of complex

positive cumulative causation, a dynamic relation can emerge whereby
international investment flows are increased to take strategic competitive advantage of sectors facing economies of scale, thereby bringing
about what Hinojosa-Ojeda and McCleery (2004) described as cumulative causation in the tradition of Myrdal.
NAFTA: Summing up the Effects
Although debate was broader in scope, most of the literature on NAFTA
has centered on how trade adjusted to the new tariff scenario and how
this affected employment. Little has been discussed about factor mobility and how the latter has reshaped the whole North American economy.
The assumptions of the different models can be summarized as follows:
tariff reduction and obstacles removal were going to increase intraregional
exports and enhance investment flows across countries, with positive
effects on production and employment. This process was expected to be
sequential in nature:

(1) It was expected that there would be a positive intraregional

growth in exports of all three economies, with the most
competitive sectors becoming the leaders. This path could be
depicted as follows:
Xij > 0

(1)

where i and j are Canada, Mexico, or the United States, with i j;

and X is exports.

(2) Intraregional export growth was going to bring an increase in

intraregional investment, mainly in the export sectors, thereby
modernizing productive capacities, primarily in Mexico, through
the introduction of new technologies:
Invij / Xij > 0

(2)

where Inv represents investment in a country.

(3) Increased investment was going to bring about positive

effects on production (GDP):
GDPij / Invij > 0

(3)

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Figure 1. NAFTA Expected Effects

(4) Increased production and economies of scale were expected

to have a positive impact on employment:
E ij / GDPij > 0

(4)

All of these effects could be summarized in an elementary diagram

(Figure 1), where it is shown how exports could create a positive cumulative effect on the rest of the economy.
Learning Regions in North America, Through Changing
Patterns of Trade and Investment
During the period from 1994 to 2003, it can be argued that NAFTA
became the most successful trade agreement in the global economy, increasing the size of its intraregional transactions by 84 percent (Table
1),1 increasing exports between the NAFTA countries from US$354 billion to US$651 billion, and increasing their share of total exports from
48 to 56 percent. Imports followed the same path, going from US$342
billion to US$631 billion, even though their regional share remained
stagnant in the range of 3637 percent of total imports.
Uneven development in exports and imports reflects a basic contradiction within the integration paradigm, as two-thirds of foreign purchases are extraregional. This could be explained by the continued

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Table 1
NAFTA: Intraregional Trade Growth (percentage of total)

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003

Intraregional
exports, share
of total exports

Intraregional
imports, share of
total imports

C=AB

43.52
45.88
47.96
46.02
46.97
48.80
51.25
54.32
55.67
55.46
56.55
56.00

35.99
36.80
37.33
37.72
39.01
39.89
40.28
40.39
39.58
39.35
38.08
36.80

7.53
9.07
10.63
8.30
7.95
8.91
10.96
13.93
16.10
16.11
18.47
19.20

Net integration
effect

Source: Authors estimates based on World Trade Organization, International Trade

Statistics (2004), table A.3.

restructuring of the U.S. manufacturing industry, which began to relocate during the 1980s and would continue its process of relocation mainly
in the less innovative sectors, where there are more standard and repetitive processes involved2 and where value added is declining. Relocation
could not be avoided in the global economy,3 as multinational corporations are willing to take advantage of economies of scale wherever they
exist. Hence, if they are inside NAFTA, they will reallocate their investment within the region but will also continually monitor the options
worldwide of investing wherever it is more profitable. The consequence
of this strategic investment planning has been to create a very competitive environment in the region, as all investments are evaluated constantly in order to asses their competitive edge.4 During the period
19942003, there was a positive evaluation of the NAFTA region by
multinational corporations that led to an overall increase in investment
flows and to a significant reshaping of productive capacities within the
region.
Capital flows were bidirectional. U.S. investment more than doubled

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55

Table 2
Investment Position of NAFTA Countries in the Region (millions of dollars)
Canada

United States

Mexico

192.409
n.a.

102.255

6.680

n.a.
61.526

74.221
n.a.

41.219

2.069

n.a.
16.968

61.036

4.611

n.a.
44.558

2003
Canada
United States
Mexico

1994
Canada
United States
Mexico

Change in Investment Position

Canada
United States
Mexico

118.188
n.a.

Source: Authors estimates based on U.S. Bureau of Economic Analysis, U.S. Direct
Investment Position Abroad on a Historical-Cost Basis, 19942003 (www.bea.gov/
bea/di/usdpos/pos_03.htm), and Foreign Direct Investment Position in the United
States on a Historical-Cost Basis, 19942003 (www.bea.gov/bea/di/fdipos/fdipos03.htm).

in Canada, and there was almost a fourfold increase in Mexico, while

flows from Mexico and Canada more than doubled their investment
position in the United States (see Table 2).
The restructuring of manufacturing under NAFTA led to a change in
the trade pattern within the region that resulted not only from the increased integration but also from the emergence of new relations among
producers. Clustering emerged in the region as a way to improve competitiveness. The largest of these clusters was the auto industry, where
strong linkages developed among producers. Thereby, autos became the
most traded good and constituted one-fourth of total trade of the region.
The logic behind this clustering was to take advantage of economies of
scale within the region, with low-end products to be produced in the
south and high-tech inputs to be developed in the north. Specialization
through clustering led to a learning process in the value chain, with lowend producers developing new skills that helped them to upgrade and
enter some new activities. This was the case with auto parts manufacturers in the automotive industry. This allowed Mexico to come into the

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INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

high-tech part of the industry, with the development of research facilities, as in the case of Delphi, which became the second-largest employer
in the country.
The arithmetic of NAFTA became more complex, as is reflected in
the evolution of the U.S. balance of payments, where the U.S. deficit
with the rest of the region rose from a low of $5 billion in 1992 to $96
billion in 2003, and the overall current account deficit grew from $13
billion in 1992 to $53 billion, constituting 3 percent of the global U.S.
deficit in 1994 and 10 percent in 2003. In this case, the deficit was the
result of the relocation of plants to Mexico and Canada. However, this
does not mean that the United States was somehow becoming less competitive. Rather, it would appear that U.S. companies were taking advantage of free trade in order to benefit from greater economies of scale
within the region, not only in the U.S. territory. This was an unexpected
outcome of integration, and it contradicts the surplus hypothesis of the
initial models put forth by trade analysts, as the latter were considering
trade without factor mobility and clustering. Once one incorporates both
factors into the analysis, it becomes clear that success cannot be measured
by a single variable, as clustering is mainly an interactive process with
multiple outcomes. Consequently, changes in patterns of trade resulted
not simply from the tariff reduction but from a more complex process,
whereby investment flows and relocation of capacities become the determinants of trade flows. Figure 2 shows how, in the global process, U.S.
manufacturing capacities have moved in the direction of the NAFTA region, while other types of investment were relocated outside the region.
Reallocation of productive capacities among the new partners and
the increased trade were expected to strengthen growth in the region,
but the result was uneven. The United States and Canada increased their
growth rates from 1.5 and 2.6 percent, respectively, during the period
1988 to 1993 and to 3.5 and 3.3 percent, respectively, from 1994 to
2003. While Mexico reduced its growth rate from 3.4 to 2.8 percent, this
uneven result shows that external forces do not have the same effect on
different sizes of economies, and that growth requires a domestic component to take advantage of the new environment characterized by greater
foreign direct investment and trade. The missing link was the lack of
investment growth in Mexico, necessary in order to take advantage of
the new investment opportunities that accompanied liberalization. The
World Trade Organization recognized that this could happen in its Annual Report of 1998, in which it indicated that mounting evidence sug-

FALL 2003

57

300,000

Forces of restructuring

250,000

Intraregional

200,000

Total 2003

150,000

Manufacturing
2003

100,000

Total
1994

Manufacturing
1994

50,000

Relocation forces
0
0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

Extraregional

Figure 2. U.S. Investment Position in and Outside NAFTA

gests that the greatest benefits of trade liberalization do not accrue immediately but over time, through stimulating investment and economic
growth (1998: 42), and concluded that it is necessary to consider the
duration of the investment process to achieve desirable levels of income.
In the North American case, free trade seems not to have the related gains
assumed in traditional theories, mainly due to the lack of linkages between the export sector and the rest of the economy. The American and
Canadian economies seem to have stronger linkages between their export
sectors and their domestic activities than those in Mexicos economy. This
is why there are differential output effects within the same region. All of
this affects not only trade and growth perspectives but also the employment outlook that has become critical in the case of Mexico.
How NAFTA Affected Labor Market Behavior
Within the NAFTA region, a total of 21.9 million new jobs were created
in the nonagricultural sector during the period 19942002 (Table 3),
with 16 million in the United States, 3.4 million in Mexico, and 2.4
million in Canada. What seems paradoxical was that most of the new
employment originated from the nontraded goods sector, while in the
traded goods industries, there was a decline. This pattern could be ex-

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Table 3
NAFTA: Job Creation and Destruction, 1994 to 2002 (thousands)
Canada
Total
Goods-producing
sector
Construction
Manufacturing
Durables
Nondurables
Services-producing
sector
Utilities
Trade
Wholesale trade
Retail trade
Transportation and
warehousing
Finance, insurance,
real estate,
and leasing
Finance and insurance
Real estate and leasing
Professional, scientific,
technical services;
business, building, and
other support services
Educational services
Health care and
social assistance
Information, culture,
and recreation
Accommodation and
food services
Other services
Public administration

United States

Region

3.452

16.050

21.924

660
154
506
383
123

1.163
749
414
255
159

217
1.621
1.762
648
1.115

1.606
2.525
843
10
834

1.762
5
352
126
226

2.289
42
911
n.a.
n.a.

16.267
93
1.939
405
1.534

19.662
46
3.202
n.a.
n.a.

106

339

523

968

62
70
8

61
50
111

980
682
298

1.103
702
401

577
87

86
202

4.492
748

5.155
1.037

239

150

2.644

3.034

163

197
36
63

29
512
24

2.422

Mexico

657
1.886
944
2.238

812
2.054
1.492
2.199

Source: Statistics Canada, Labour Force Survey Estimates (LFS), by North American
Industry Classification System (NAICS), Sex and Age Group, annual (persons unless
otherwise noted) (22440 series), CANSIM table 282-000. Instituto Nacional de
Estadistica, Geografa e Informtica, Sistema Nacional de Cuentas Nacionales 1993
a 2002; and U.S. Bureau of Labor Statistics, Employment, Hours and earnings from
the Current, Employment Statistics Survey, national (available at http://data.bls.gov/
outside.jsp?survey=ce/).

FALL 2003

59

plained by the relocation of industries outside the region, as exemplified

by the manufacturing sector, in which the United States lost almost 2
million jobs, two-thirds of which were from the nondurable goods sector and one-third from durables. Within the goods-producing sector, jobs
were created primarily in construction in the three countries. This process shows that export industries were not creating sufficient jobs, either because of relocation of firms or because of the competitiveness
paradigm within NAFTA that forced manufacturing firms to reduce personnel as a way to maintain low unit costs.
The service-producing sector was the leader in job creation under
NAFTA. The leading activity was professional services, with 5.2 million new jobs created. This can be explained by the emergence of more
independent activities as a result of the restructuring of the labor market, particularly with casual employment on the rise. The second largest
job-creating activity was trade, with 3.2 million new jobs, due mainly to
the boom in retail trade throughout the whole region. The third activity
was health care and social assistance (with 3 million new jobs), a sector
that is becoming increasingly important, as there is a rising demand for
health services to attend people at home or in nursing institutions. Expectations are that demand in this area will continue to increase. The
fourth activity was public administration (2.2 million new jobs), with
growth that comes mainly from the restructuring of the public sector in
the United States, where regional and local governments have become
more important in the delivery of public services. New niches of employment also emerged in the accommodation and food services industry (2
million), as new outdoor activities are on the rise in North America, and in
educational services (1 million), where there is an increasing demand
for new professionals in lifelong training for a more mature society.
One of the main problems arising from this new integration process
has been the incapacity of Mexico to create paid employment. During
the period from 1994 to 2002, the labor force increased by 1.3 million a
year, while total remunerated employment growth averaged 533,000 per
year. This huge gap has been filled by informal markets and migration,
resulting in a deteriorating social environment. One positive aspect of
this imbalance has been the strength of labor market growth in the United
States, at a rate of 1.7 million new jobs per annum. These new U.S. jobs
have been absorbing an increasing number of migrants, mainly from
Mexico.
Leading export sectors in the United States, Canada, and Mexico were

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not, however, the ones to stimulate overall employment; their contribution was marginal. Of the total of new jobs created, the leading sectors
share was only 2.81 percent in the United States, 0.77 percent in Mexico,
and 20.51 percent in Canada. In fact, in some of these sectors, the impact on job creation has been negative, mainly in Mexico (primary metal
industries, industrial machinery and equipment, leather and leather products, food and kindred products, chemicals and allied products, fabricated metal products, and stone, clay, and glass products) and the United
States (paper, chemicals, farms, and transportation). In Mexico, the leading export sectors underwent some restructuring, as in the glass and
primary metal industries; while, in the United States, the chemical industry suffered the new technologies syndrome, and the lumber industry is one of those traditional sectors that had not been able to modernize.
What is clear from this comparison of job creation is that the sectors
creating additional jobs were outside of the new export industries. Therefore, it could be argued that these export sectors are not labor intensive,
as was assumed in the original NAFTA debates.
Canada and Mexico maintained a policy of competitiveness via low
wage growth. This is a self-defeating strategy, as it weakens ones domestic market and does not allow capacities for taking advantage of
economies of scale, which was one of the main issues in the NAFTA
debates. This led to a process in which markets and macro policies act
against one another, instead of reinforcing the integration process. One
hypothesis here is that these divergent paths derive from labor market
behavior: Canada and Mexico have been pushing integration based on
low wage policy, while the United States has had an innovation policy
that encourages real wage growth. NAFTA faces, therefore, the prevalence of two competitiveness paradigms, one based on low cost and the
other based on innovation.5 Because the first option is self-defeating, in
the long run, the only viable competitiveness strategy among partners
will be through innovation. Paradoxically, labor productivity has been
growing in Mexico at a faster pace than in Canada. From this, it ensues
that Mexican workers are not getting their share of this increase in productivity (see Figure 3 and Table 4).
Diaspora Productive Effects on the Region
One of the most important effects of low growth in Mexico and the
higher growth in the United States and Canada has been the growing

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Table 4
NAFTA: The Low Cost Competitiveness Paradigm Hourly Compensation
Costs for Production Workers (in U.S. dollars)

Manufacturing
1994
2002
Food and beverages and tobacco
1994
2002
Textile, apparel, and leather
products
1994
2002
Textile mills products
1994
2002
Apparel
1994
2002
Transportation equipment
1994
2002
Electronic and other
electric equipment
1994
2002

United States

Canada

Mexico

17.19
21.33

16.10
16.02

1.65
2.38

15.12
18.44

14.90
14.20

2.01
2.36

10.62
14.35

9.60
n.a.

1.93
1.89

12.01
15.73

11.59
12.37

2.45
2.42

9.54
13.06

8.25
n.a.

1.44
1.60

24.88
29.68

19.68
19.45

3.92
4.99

16.19
21.12

15.56
15.28

2.03
2.45

Source: U.S. Bureau of Labor Statistics, Hourly Compensation Costs for Production
Workers in Manufacturing, 30 Countries or Areas and 40 Manufacturing Industries,
Selected Years 19752002 (available at www.bls.gov/fls/flshcind.htm).

presence of Mexicos diaspora in the United States. Data from the U.S.
Justice Department show that during the period 19892001, approximately 14 million persons migrated to the United States, of which 3.7
million came from Mexico and 360,000 from Canada. Migration to the
United States from its NAFTA partners accounted for about 10 percent
of the U.S. population increase during the period between 1989 and
2002. The NAFTA debates avoided the thorny issue of migration, as it
was expected that as trade would increase, domestic production would
expand and would generate greater employment opportunities and bet-

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INTERNATIONAL JOURNAL OF POLITICAL ECONOMY

180

170

Index 1993 = 100.0

160

150

140

130

120

Mxico
Mexico
110

USA
USA
Canada
Canad

100
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Figure 3. NAFTA: Productivity Growth

ter conditions internally, thereby creating disincentives for people to

emigrate from their homelands. Low growth of output and employment
has led to diminished expectations in Mexico, thus favoring greater immigration to the United States and Canada.6
Migration dynamics unleashed a debate that focused on the assimilation of migrant workers in the host economy (learning process) and on
the convergence of their earnings with those of domestic workers (Borjas
1994a; Borjas et al. 2002; Ethier 1986; Benjamin, Gunderson, and Riddell
2002). However, this analysis has stopped at the micro level. To date, no
macro analysis has been undertaken to study its sequential effects on the
whole economy. The hypothesis in this article is that low growth in a
highly populated country leads to emigration. Although lowering social
pressures in the short run, emigration represents a loss of human capital,
leading to a reduction of potential output in the home country. As the
host economy increases the size of human capital through immigration,
it acquires additional inputs that generate a larger GDP. This hypothesis
is based on the well-known theory of human capital (Mankiw, Phelps,
and Romer 1995), where growth (Y) is postulated to be a function of
both physical capital accumulation (Kp) and human capital (Kh), as expressed in the following formula:
Y = (Kh, Kp)

(5)

0.405
0.679
0.946
0.214
0.127
0.111
0.090
0.166
0.147
0.132
0.148
0.174
0.206
0.219
3.763
0.269

1.091
1.536
1.827
0.974
0.904
0.804
0.720
0.916
0.798
0.654
0.647
0.850
1.064
1.064
13.851
0.989

Mexican
diaspora to
United States
(millions of
persons)

0.026

0.359

0.012
0.168
0.014
0.015
0.017
0.016
0.013
0.016
0.012
0.010
0.009
0.016
0.022
0.020

Canadian
diaspora to
United States
(millions of
persons)

0.294

4.123

0.417
0.847
0.960
0.229
0.144
0.127
0.103
0.181
0.158
0.142
0.156
0.190
0.228
0.239

Canadian
and
Mexican
diaspora
(millions of
persons)

26.2

29.8

38.3
55.1
52.5
23.5
15.9
15.8
14.3
19.6
19.8
21.7
24.2
22.4
21.5
22.5

Canadian
and
Mexican
share of
total
migration
(percent)

3.17

41.26

2.79
3.36
3.40
3.36
3.18
3.32
2.80
3.36
3.20
3.18
3.14
3.11
3.06

U.S. annual
population
increase
(millions of
persons)

9.1

10.0

30.4
28.6
6.7
4.3
4.0
3.1
6.5
4.7
4.4
4.9
6.1
7.3
7.8

Canadian
and Mexican
diaspora
share in U.S.
population
increase (%)

Source: Estimates based on U.S. Department of Homeland Security, Office of Immigration Statistics, 2003 Yearbook of Immigration Statistics,
September 2004, table 2 (Immigration by Region and Selected Country of Last Residence Fiscal Years 18202003); and U.S. Census Bureau
Statistical Abstract of the United States 2003, table 2 (Population 1960 to 2002), p. 8.

1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Period
19892002
Average
19892002

Year

Migrant
population to
United States
(millions of
persons)

Table 5
Canadian and Mexican Diaspora in NAFTA

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In a full employment context, the increase of inputs would bring a

proportional increase in GDP. Yet, real-world output is always below
potential. Excess capacity is prevalent in North America, where, for
instance, at the end of the first quarter of 2004, estimates of capacity
utilization7 were 64 percent for Mexico, 76.5 percent for the United States,
and 83.5 percent for Canada. In the case of human capital, employment
multipliers do not allow, in all cases, full advantage to be taken of
existing human capital. Once capacity utilization is recognized, then
growth becomes a function of physical capacity utilization and also of
the degree of utilization of human capital, so that growth (Y) could
be expressed as follows:
Y = f (( Kp ) + ( Kh ( Kh Kp ))

(6)

where Y = GDP; Kh = human capital; Kp = physical capital; = employment multiplier; and = degree of physical capital utilization.
In accordance with this simple specification of the growth process, in
a closed economy where human capital is underutilized, unemployment,
underemployment, or the informal economy will become its characteristic features, and output will be below its full employment level. All of
this will generate social tensions; and the final output will depend on the
institutional framework that could allow for either a soft landing (i.e.,
institutional frameworks where there are unemployment benefits) or
social deterioration (i.e., informal markets).
In an open economy scenario, unemployed workers can migrate so as
to reduce social tensions in the home country and increase growth potential in the host economy. This migration option could be described as
the effect. If we extend the analysis to two open economies, growth
will be determined not only by domestic human and physical capital but
also by migration. Hence, migration would be positive for the host
economy or country of immigration (i) and negative for the home
economy or country of emigration (e), as shown below:
Yi = f (Kh, Kp, + )

(7)

Ye = f (Kh, Kp, )

(8)

Human capital mobility allows a GDP exchange among both economies, as the economy with emigration will face a reduced level of production (lost product), while the host economy will increase its GDP
(earned product). This model allows us to introduce migration as an
important factor in the determination of macroeconomic performance

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Table 6
Mexican Diaspora Estimated Effects on U.S. GDP
Step 1
Mexicans in the U.S. labor force (thousand of persons)
Step 2
U.S. GDP (million of dollars)
Average U.S. productivity (in dollars)
Step 3
Mexican diaspora estimated GDP
Diaspora share in U.S. GDP (percent)
Step 4
Diaspora remittances to Mexico (millions of dollars)
Step 5
Diaspora net contribution to U.S. GDP (millions of dollars)
Diaspora net share in U.S. GDP (percent)

11.151
10,987,900
79,812
889,979
8.1
13,266
876,713
8.0

Source: Authors estimates based on data from the U.S. Bureau of Labor Statistics and
Bureau of Economic Analysis, U.S. Department of Commerce.

(the evolution of GDP), thereby broadening the microanalysis that has

been developed around migration (Zimmerman and Bauer 2002).8
Recognizing the important role that migration plays in the growth
process, we can now estimate the lost and earned product among
the North American economies. In the Current Population Survey, the
U.S. Bureau of Labor Statistics estimates the number of employed Mexican emigrants active in the American labor force for 2003 at 11.2 million with remunerated occupations.9 In order to obtain the diaspora GDP
estimate (earned output), average labor productivity (U.S. GDP per
worker) was estimated, and it was applied to the migrant Mexican labor
force figures, to get its GDP share; the same procedure was followed to
measure Mexicos lost output. Estimates for the United States are shown
in Table 6, where the effect of the Mexican diaspora entails a significantly larger GDP due to immigration.
In much the same way, estimates of Mexican GDP lost due to the
diaspora are shown in Table 7. The effect is a loss of almost one-third of
what could have been produced if all those migrants would have held
employment in their own country. If this latter scenario would have been
realized, GDP per capita could have reached US$7,000, a 15 percent
increase above the prevailing value of slightly over US$6,000 in Mexico.

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Table 7
Mexican Diaspora Estimated Effects on Mexico GDP
Step 1
Mexicans in the U.S. labor force (thousands of persons)

11.151

Step 2
Mexico GDP (million of dollars)
Average Mexico productivity (in dollars)

626,602
15,421

Step 3
Lost GDP due to diaspora (millions of dollars)
Share of Mexico GDP (percent)

171,959
27.4

Step 4
Diaspora remittances to Mexico (millions of dollars)
Step 5
Net loss due to diaspora (millions of dollars)
Loss share of GDP (percent)

13.266
171,946
27.4

Source: Authors estimates based on data from the INEGI, U.S. Bureau of Labor
Statistics, and Bureau of Economic Analysis, U.S. Department of Commerce.

Another type of analysis has been realized under the hypothesis of

labor surplus (Borjas 1996), where the positive effect of Mexican migration comes from lower wages, rather than from the increased production. However, the problem with microanalysis is that it assumes the
benefits for the host country as a product of lower costs rather than the
result of an increase in human capital.10 A discussion of the macroeconomic effects of the diaspora restores the Keynesian perspective in which
macroaggregates are incorporated into the analysis to avoid losing the
global interaction among micro agents. Analysis based on purely
microeconomic foundations has focused on the impact of migration via
cost reduction, which remains an incomplete analysis and leads to inappropriate policy recommendations in which the whole burden of adjustment falls on labor. With macro analysis, the basic hypothesis is that as
far as there is human capital mobility, there will be an exchange of production levels between regions, with earnings for the host economy and
losses for the home economy, as can be observed in Figure 4.
Policy recommendations based on this new type of analysis bring
forth the need to formulate macroeconomic policies in an environment in
which migration is important. This is due to the simple fact that the host
economy increases its output largely at the expense of the home economy.
Long-term discussion has to involve these redistributive implications, per-

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67

Kp

Kp

Home Economy

Kh

Kp = physical capital accumulation

Kh
Host Economy
Kh = human capital

= migration

Figure 4. Diaspora Effect on Potential Output

haps along the lines as found in the European Union, where, at least, it has
been recognized that compensatory transfers are required in order to improve living conditions in the migrant countries (Spain, Portugal, Italy,
and Greece) and, by so doing, reduce emigration. Hence, it could be argued that the acceptance of intercountry transfers is a recognition of the
positive effects of migration on countries with low population growth.
Some Preliminary Conclusions: The Need for a Discussion
Agenda
The optimistic expectations that NAFTA would have created a virtuous
circle of increased production and employment have not been fulfilled.
Canada and the United States were unable to pull the Mexican economy
onto the same growth path, because the multiplier effects of the export
sectors are much lower than expected in the less developed areas of
North America. There are no clear-cut linkages that could really develop a network of growth, and there are no policies in the region that
attempt to develop them. Emphasis has been given to enhance the socalled competitiveness edge via two different approaches. For the United
States and, to a lesser extent, Canada, the competitiveness edge has largely
been an innovation approach, while in Mexico, it has essentially been a
cost approach. Prevalence of these two different approaches to competitiveness reduces the possibility of a smooth pathway to further integration, as the first encourages human capital development, while the other is
based on a low wage policy. If the objective is further integration, there

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must be a change toward an innovation strategy that emphasizes the idea

that the only long-term solution to further integration is the creation of a
knowledge-based region where all participants would be able to improve
their standard of living. Innovation revalues the role of human capital in
the development process and introduces the idea of high-quality jobs.
An agreement also has to be reached on how factor mobility affects
growth. A larger role needs to be accorded to this analysis due to the fact
that capital and labor mobility has increased tremendously during the
last decade, but little importance has been given to its impact. In fact,
higher growth has been the result of factor mobility. U.S. output is 10
percent larger thanks to the migration effect, while Mexico has suffered
a loss of about 30 percent of its pre-emigration potential output. All of
these effects need to be discussed in a systematic way, so as to reach a
consensus on how different factors can be combined to identify a policy
mix that could generate more balanced growth within the whole region.
The burden of adjustment has fallen on labor markets. Disequilibrium among sectors has been resolved through employment reduction,
and when factor mobility is considered, migration has turned out to be
the main mechanism of adjustment. Trade liberalization and the free
trade agreement have proven to be insufficient to enhance economic
performance, even with capital mobility within the region. What has
now become clear is that external factors could help; but, as far as there
are no endogenous forces that could reinforce growth, external factors
will not solve the long-term problems faced by these economies. What
has also become evident from the analysis is that market adjustment
alone will not lead to full employment of existing resources. Adjustment requires public action to coordinate the effort. For that purpose,
there has to be public recognition that the three countries have to develop an institutional framework so as to discuss long-term problems
based on strategic planning.
Governments have to be aware of the need for strategic planning for
several reasons. One starting point could be to address the problem of
long-term demographics facing the three countries in the near future, as
there will be a need for further migration to compensate for the declining birthrate and the aging of the population in Canada and the United
States. In this context, how the three economies face labor market integration will become critical and surely cannot rely solely on the role of
the market to achieve further integration with a narrowing gap in the
standard of living.

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69

One of the main areas of debate will be on the precise pattern of the
new productive integration in the three countries. The auto industry has
become the leading sector, but no other area has realized a similar effort. It has to be mentioned that recently, most of the foreign direct investment has been pouring into the service sector, mainly in the financial
sector. Patterns of specialization will define the trends of labor market
absorption and will also define the outlook for productivity growth. Under
todays framework, workers will be able to capture some of the gains
only on the margin. For this reason, common rules for productivity sharing will be required; otherwise, social tensions could increase throughout the region.
The main questions that need to be addressed are as follows: (1)
how far is North American society willing to proceed if the treaty is to
go beyond the initial stage based on market integration, and (2) what
are the conditions needed to put in place a transfer mechanism to foster structural change in Mexico and Canada? This discussion has not
arisen among academics or in any institutional forum. The proposal
here is to discuss how large the transfer will need to be to reduce the
gap in per capita GDP among the three NAFTA countries. If economic
welfare is to be one of the aims of the treaty, analysis has to broaden so
as to include how institutions in the area are working for this purpose. It
is clear that Mexico requires a modernization agenda of all the existing
institutions, but the problem is how to coordinate the effort of discussion in such a way that the three countries could be involved. NAFTA
discussion was held under the stimulus of trade gains and to avoid losses
for the different participants. It is now necessary to find the new stimulus that could direct the region toward a new stage of integration.
Notes
1. Intraregional trade within NAFTA is just one-third of the intraregional trade
within the European Union.
2. Discussions on the subject were held with members of the Education and
Labor Force Committee of the U.S. House of Representatives.
3. Karen Helene Midelfart-Knarvik and Henry G. Overman (2002) discuss and
support this idea in their paper on relocation and European integration.
4. The experience of the computing industry in Jalisco is a good example of
this. U.S. transnational corporations decided to relocate their notebook capacities to
their plant in El Salto, Jalisco, in the 1990s but, as the chain value was reassessed,
they decided to transform their operation in the region and transform the manufacturing facilities into a large software development center.

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5. An extensive discussion on innovation can be found in Innovation, the Missing Dimension by Richard Lester and Michael Piore (2004). In this book, the authors provide an industry analysis of how innovation takes place and shed light on
what innovation is about.
6. On the question of migration within NAFTA, Papademetriou (2003) points
out that the negotiators did not include a migration scheme in the treaty.
7. Estimates were realized by the Instituto Nacional de Estadstica, Geografa, e
Informtica in Mexico, the Federal Reserve in the United States, and Statistics Canada.
8. Zimmerman and Bauer (2002) compiled four volumes on the subject, but in
all cases, the effects are analyzed in a microeconomic perspective, which includes
different areas of analysis: migrants situation, decision to migrate, family migration, illegal migration, migration policies, assimilation of migration, and the role of
language and intergenerational problems, but in no case is there an analysis of the
impact of migrants on GDP.
9. See the U.S. BLS Current Population Survey Web page (www.bls.gov/cps/
home.htm). Data are from June 2004, table 6, listing employment status of the Hispanic or Latino population by sex, age, and detailed ethnic group.
10. The growth impact of migration in this paper suggests a different point of
view of how migration affects the U.S. economy and questions the moralist view of
Samuel Huntington (2004) that assumes that Hispanic migration entails a loss of
national identity for the United States. In contrast, the facts show that Hispanic
migration has allowed the American Dream of upward mobility to continue, as
they have formed the base of the new American economy.

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